Macroeconomic dynamics of the output floor

Jonathan Acosta-Smith, Marzio Bassanin and Ivy Sabuga
Additional contact information
Jonathan Acosta-Smith: The Organisation of Economic Co-Operation and Development
Marzio Bassanin: Bank of England
Ivy Sabuga: International Monetary Fund.

No 1206, Bank of England Staff Working Paper series from Bank of England

Abstract: We assess the macroeconomic effects of the output floor, a new regulatory constraint introduced as part of the Basel III framework. The output floor is designed to provide a backstop against excessively low risk-weighted assets (RWA) modelled by banks relative to the riskiness of the underlying exposures. Our model shows that it counteracts the downward pressure on modelled RWA during economic expansions and, in turn, reduces the cyclicality of risk-weighted capital requirements. This mitigates increases in the credit-to-GDP ratio and supports the objectives of the macroprudential authority. Our analysis also uncovers important sectoral effects. Estimating the model for the UK economy, we find that during an expansion the output floor dampens the growth of mortgage lending but amplifies the expansion of lending to firms, although the latter effect is more than offset by the former.

Keywords: Capital regulation; output floor; macroprudential policy; DSGE models (search for similar items in EconPapers)
JEL-codes: E32 E44 E58 (search for similar items in EconPapers)
Pages: 39
Date: 2026-09-04
References: Add references at CitEc
Citations:

Downloads: (external link)
https://www.bankofengland.co.uk/-/media/boe/files/ ... the-output-floor.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:023582

Access Statistics for this paper

More papers in Bank of England Staff Working Paper series from Bank of England Bank of England, Threadneedle Street, London, EC2R 8AH. Contact information at EDIRC.
Bibliographic data for series maintained by Research ().